Rogge, Can Capitalism Survive?, Part VI: Library of Economics and Liberty http://www.econlib.org/library/LFBooks/Rogge/rggCCS6.html#Part%20...

Author: Rogge, Benjamin A. (1920-1980)

Title: Can Capitalism Survive?
Publisher: Liberty Fund, Inc.
Publication Date: 1979
First published: 1979 Benjamin A. Rogge

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Part VI
ON MONEY AND INFLATION

Part VI, Introduction

VI.I.1
In this section, I deal with that most ubiquitous of all diseases of economic life:
inflation. As Lenin predicted, it is fast becoming the instrument of the disintegrating
process in capitalist economies—though its ravages are equally visible in the
socialist economies of the world.
VI.I.2
The first paper is one version of a long-run-economic-outlook speech that I have
been giving to various groups for a number of years. Given the bleakness of the
outlook presented here, I wish that I could report that events have given the lie to my
prophecies, but such does not seem to be the case.
VI.I.3
The second paper, "Alleged Causes of Inflation: Corporate Monopolies," was
presented in March 1976 at the fourth annual conference of the Committee for
Monetary Research and Education, held at Arden House, Harriman, New York.

Part VI, Chapter 1

The Long-Run Economic Outlook

The most probable course of events in the American economy in the next ten to VI.1.1

fifteen years is the following: (1) continuing, in fact, accelerating inflation; (2) no

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major depression, but occasional periods of reduced real output (and hence
employment); (3) off-and-on price and wage controls; (4) a rising pattern of interest
rates; (5) an increasing direction of private economic activity by public agencies; and
(6) an increasingly hampered economy, with an associated decline in its efficiency
and its capacity to produce economic growth. The most probable final outcome of all
this is that the American economy will come to look very much like the English
economy of today, an economy that one English observer has described as "sinking
slowly under the sea, giggling as she goes down."
VI.1.2
The reasons for this probable course of events are many and complex. However,
many of those reasons relate to what I believe to be serious misconceptions about
what inflation is, what causes it, and what it can and cannot produce.

Misconceptions about Inflation

VI.1.3
(1) The primordial sin in treating of inflation is that of assuming that interest rates
can be kept at some desired level (usually "low") by increasing the money supply,
i.e., by an easy money policy. It is typically argued that high interest rates reduce
investment, curtail output, reduce home building, penalize the debtor-poor to the
advantage of the creditor-rich, etc., and that low interest rates are clearly to be
preferred to high. This argument is filled with dubious connections, but the real
trouble flows from the attempt to implement its thesis by means of continuous
inflation.
VI.1.4
The fact of the matter is that the level of interest rates is a market phenomenon, and
not only is it undesirable for government to seek to control it but it is largely
impossible for it to do so as well. It is true that by adding to or subtracting from the
rate of change in the money stock, temporary changes, particularly in short-term
rates, can be achieved—and this illusion of effectiveness is the precise source of the
problem. Suppose for example that the monetary authority (i.e., the Federal Reserve
System) were to bring about a significant injection of new money into the economic
stream over a short period of time. The point of impact of the injection would
normally be the short-term money market, and the rather immediate consequence
would be a fall in the short-term rate of interest. However, over the course of the next
few months, as this new money churned through the economy, there would be a
tendency for spending of all kinds to increase, with consequent upward pressure on
prices. This in turn would lead both businesses and individuals to wish to spend more
now, to build up inventories or undertake expansion of plant, or buy durables and
homes now before prices go even higher. This increased propensity to spend would
be translated into a sharply increased demand for loanable funds. This in turn would
mean that the original increase in the quantity of money would be offset by the
increased demand for loanable funds, and interest rates would start to climb.
Moreover, as potential lenders would see prices rising, they would insist on an
inflation premium in the interest rate; in other words, the supply curve of loanable
funds would shift up and to the left, indicating that it would now take a higher rate to
bring forth a given volume of loanable funds than was true before.
VI.1.5
But why can't this countering effect be matched or more than matched by continuing
injections of new money? Because this would mean continuing inflation and this in
turn would mean a demand by lenders for an even higher inflation premium on
interest rates.

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VI.1.6
To try to cure the problem of high interest rates by increasing the quantity of money,
i.e., by inflation, is like trying to cure a hangover by some "hair of the dog" the next
morning. The temporary feeling of wellbeing is closely followed by a renewed attack
of the problem; the alleged remedy is in fact not a cure to the problem but its precise
cause. It is inflation that causes high interest rates, not the reverse, the Honorable
Wright Patman to the contrary. There is one way and only one way to bring the
market rate of interest back to the levels we tend to think of as normal, and that is to
take the inflation premium out of interest rates by taking the inflation out of the
economy—and there is only one way to do that, and that is by keeping the quantity
of money from going up faster than the output of goods and services.
VI.1.7
(2) A related misconception is that it is possible to trade off any given degree of
inflation for corresponding levels of unemployment, i.e., that we can purchase
whatever level of unemployment we think bearable or desirable by paying the cost in
the form of some predictable level of inflation. (This is the famous Phillips Curve
hypothesis of recent fame.)
VI.1.8
It can be demonstrated that this is true only if the specified level of inflation is
unanticipated by the economic units in the society. Thus an unanticipated rate of
inflation of 5 percent may be consistent in a given economy with a 3 percent level of
unemployment. But of course a continued rate of inflation of 5 percent soon comes to
be anticipated by wage earners, lenders, and others in the economy; this in turn will
lead them to demand an inflation premium in their wage rates, interest rates, etc., and
the changing cost structure, given no change in the rate of increase in the money
supply available for spending, would produce reduced outputs and rising
unemployment. When this happens, the 5 percent rate of inflation comes to be
associated with a much higher rate of unemployment, say 6 percent. To bring the rate
of unemployment back to 3 percent would now require an additional and
unanticipated inflation factor of (say) another 5 percent, for a total rate of inflation of
10 percent. In other words, as for the drug addict, ever increasing dosages come to be
necessary to achieve any given level of "high" or feeling of well-being. Any attempt
to maintain unemployment at some given, desired level by the means of a
continuously easy money policy must mean not just continuous but accelerating
inflation.
(3) Another related misconception can be handled very quickly. It is the belief that VI.1.9

the liquidity problems of individuals, businesses, government, and whole nations can
be cured by increasing the supply of money within nations and worldwide. An
economic unit can be said to face a liquidity problem wherever it can make necessary
borrowings only at interest rates that are inconsistent with other parameters in its
system, e.g., the family's income available for payments on interest and principal, or
the prices the business firm can charge for its product, or the level of taxation a
political unit feels it can impose on its citizens, or the interest payment outflow that a
nation's balance-of-payments position would seem to tolerate. The fact is of course
that it is inflation itself which tends to produce this seemingly universal illiquidity.
Borrowers are tempted to borrow for the very good reason of buying now before
prices go even higher; lenders are tempted to lend by the ready insistence of
borrowers and the rising charges they can impose on loans. One special feature of
this process deserves mention here. In those periods of time when an easy money
policy has brought about a temporary lowering of the short-term rate relative to the
long-term, those institutions which tend to borrow short and lend intermediate and
long tend to expand both their borrowings and their lendings. When the inevitable

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rise in the short-term rate comes, they then find themselves with a most embarrassing
problem of liquidity. At this point they never cease to cry aloud for a new injection of
money to save them from a liquidity crunch or crisis. Again the proposed remedy for
the ailment turns out to be that which brought the ailment in the beginning and also
that which is certain to produce a recurrence of the ailment at a later date.
VI.1.10
A liquidity problem, whether it be for Joe Doaks and family, the Widget
Manufacturing Company, the First National Bank of Everywhere, the U.S.
Government, or the countries of India, England, Italy, and Japan, can never be solved
by inflation, by creating more dollars or more pounds or more yen or more SDRs.
The temporary relief so gained is purchased at the price of a certain recurrence of the
disease, and in a more virulent form.
VI.1.11
(4) Another misconception is that inflation is caused by something other than the
money relationship and that it can be stopped by doing things other than that of
bringing about a proper relationship between the stock of money and the output of
goods and services.
VI.1.12
One form that this misconception takes is the Keynesian one, the belief that changes
in total spending in the economy are not as closely related to changes in the stock of
money as to other variables, such as business and consumer propensities and the
fiscal actions of governments. For example, in the mid-sixties, the Keynesians who
were advising the Johnson administration assumed that in urging a more restrictive
fiscal posture on the government, they had taken the important step in fighting the
developing inflation and that they could then feel free to recommend a somewhat
easier money policy. Although their advice was not followed in all details, the course
of action was roughly what they called for—but the consequences were what
Friedman and the monetarists were predicting, i.e., rising inflationary pressures under
the influence of excessive monetary ease.
VI.1.13
Another and more disquieting form that this misconception takes is what might be
called the Galbraithian one. It is the belief that inflation is really produced through
the domino effect of price and wage increases triggered by powerful business, labor,
and farm groups in the economy. This point of view is supported neither by common
sense nor theory nor the facts. Professor Paul McCracken once said of this idea that
"it is still common among uneducated people. Galbraith's view is unusual only in
being held by the president of the American Economic Association and in being
described by him as new."*58
VI.1.14
It is indicative of the nature of the problem we are facing that this self-same
McCracken was to publicly defend a system of wage-price controls instituted by his
president just three weeks after he, McCracken, wrote the above statement.
VI.1.15
Strong groups within the economy may be able to divert spending in various
antisocial ways but they cannot bring about an increase in total spending, which is
what inflation is all about. Trying to stop inflation by wage and price controls is like
trying to cure a fever by breaking the thermometer. The observed wage and price
increases are but symptoms of the disease. The real problem is the heat in the body
economic and this can be reduced only by reducing the rate of increase in the
quantity of money.
VI.1.16
(5) A final misconception about inflation is that it should be and is possible to stop an
inflationary process without cost to anyone in society (except perhaps the very rich,
who deserve their comeuppance in any case).

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VI.1.17
The fact is that once inflation lasts for any length of time, it will come to be
anticipated in the decisions of a greater part of the society. If inflation is stopped,
those anticipations prove to have been in error and the decisions based on those
anticipations now have painful consequences: unemployment for the workers who
had demanded the higher wages, losses for the firms who had contracted to pay the
higher costs, financial loss to all who had purchased assets, directly or indirectly, in
anticipation of rising prices, financial distress to all who had borrowed long-term
money at high interest rates, etc.
VI.1.18
The fact is that we can find not one single case of a society that has been able to stop
an inflationary addiction without serious withdrawal pangs, in the form of higher
rates of unemployment, lower real output, declining profits, etc. Moreover, the
experience indicates that the longer and more rapid the inflationary surge, the more
painful the withdrawal process.

The Prophecy

VI.1.19
We turn now to my not-so-Delphic forecast of things to come. We have before us
most of the ingredients on which I base my specific predictions.
VI.1.20
(1) We will have continuing, in fact accelerating inflation in the years ahead.
Reasons: (a) It would be too painful to stop it. Not only would it be painful to many
of the citizenry; because it would be painful to the citizenry, it would be political
suicide for any administration that really attempted to do it. I am saying that I doubt
if any administration could stay in power long enough (or continue to have power
enough) to carry through to conclusion a really successful struggle to end inflation.
(b) For the same reason, the administrations in power, of whatever political party,
will find it necessary to move to a higher rate of inflation from time to time to avoid
the letdown that continuing a fully anticipated rate of inflation inevitably brings.
VI.1.21
(2) We will not have a major depression in the next two decades. No administration
could tolerate it, and the alternative (a step-up in the rate of inflation) is much less
dangerous, politically, than a major depression. However, because of the imperfect
nature of all attempts at control and because of the necessity from time to time of
taking half-hearted steps to slow down inflation, there will be occasional periods of
recession. These will be marked by reduced rates of real growth, perhaps even
negative real growth, higher unemployment, etc., but not by lowered levels of prices
and wages. (The descriptive word is "stagflation"—stagnation with inflation.)
VI.1.22
(3) We will have off-and-on wage and price controls. Too many people believe the
Galbraith myth, and the pressure on administrations to do something (or to seem to
be doing something) about inflation will bring recurring trials with direct controls.
Each new return of controls will be greeted with huzzahs and cheers (even from the
business community), only to fall victim to the inevitable frustrations and conflicts of
the economic anarchy produced by those controls. Each repeal, though, will leave a
larger part of the economy under some form and degree of direct controls.
(4) The combination of continuing (accelerating) inflation and on-again off-again VI.1.23

controls will make it increasingly difficult for economic calculation to take place
with any degree of efficiency. The subsequent inefficiencies, shortages, frustrations,
and inequities will lead to increasing demands for even more detailed control of the
private sector. In banking, this may well take the form of governmentally assigned

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quotas of lending to identified groups and for identified purposes at levels of interest
rates well below market. This in turn will mean that the government will itself
become an ever more important guarantor of loans and fund source of last resort.
VI.1.24
(5) The increasing control of economic life by government can have but one effect on
the vitality and strength of the economic process—and that is to sap the vitality and
diminish the strength of the most productive economic system in the history of man.
With the size of the pie growing but slowly or diminishing, the conflicts over its
division will increase in intensity. As the English experience so clearly demonstrates,
these conflicts (particularly in the form of labor disputes) can make the efficient
functioning of an integrated economy virtually impossible.
VI.1.25
All of this in turn will reduce the capacity of this country to compete in world
markets. Our fate, as England's, will then be chronic balance-of-payments problems,
continuing loss of faith in the currency in the world money markets, and periodic
crises of increasing dimension. If this analysis be at all accurate, then we can say,
with Archie the Cockroach, that there is indeed more reason to be optimistic about
the past than about the future.

Part VI, Chapter 2

Alleged Causes of Inflation: Corporate Monopolies

VI.2.1
The question before the house is whether inflation is caused, in whole or in part, by
the exercise of private market power in the economy. So as to relieve what little
suspense there may be, let me hasten to say that the answer to this question is "No."
Inflation is not produced by the assistant manager of the A&P store who marks out
43¢ on the can of beans and replaces it with 47¢. Its source is not to be found in the
executive offices of the major oil companies—nor even in the exotic, air-conditioned
chambers of the oil ministries of the oil producing states of the Third World. Nor is it
to be discovered in the admittedly disconcerting, often violent, actions of the minions
of George Meany. Even the God of the rainfall, the wind storm, and the wheat rust is
blameless of visiting this affliction upon us.
VI.2.2
Where, then, must we look if we wish to find those who do in fact control the forces
of inflation? To somewhat (but not too seriously) oversimplify, we need look no
further than the Open Market Committee of the Board of Governors of the Federal
Reserve System. Our fate is determined in the discussions and decisions of this group
of reasonably intelligent, eminently well-meaning men of affairs.
Admittedly, these men do not make their momentous decisions in a policy vacuum. VI.2.3

As a creature of the legislature, they are operating under certain legislative

commands; even more importantly, they are operating in an environment of public
opinion, public expectations, and even public clamor. To paraphrase Mr. Dooley,
even the Board of Governors of the Federal Reserve System reads the election
returns. Thus, if you believe as John Maynard Keynes, Richard Weaver, and I do that
ideas do have consequences, that today's public clamor is in large part a product of
the academic scribblers of years past, it is necessary to say that Open Market
Committee decisions are only the proximate cause of the inflationary pressures of the

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day; the real roots of the problem (and the hopes for its solution as well) are to be
found in the cluttered closets where people like John Maynard Keynes, Ludwig von
Mises, John Kenneth Galbraith, Walter Heller, Milton Friedman, et al., go about (or
have gone about) their work. The regression equations developed by the research
staff of the St. Louis Federal Reserve Bank may well be some part of the ammunition
that will eventually bring down the walls of the inflationists. In other words, it is
ideas, whether right or wrong, that finally count, and one of the most important of the
mistaken ideas to be disposed of is the one under discussion here: the idea that
market power produces inflation and the corollary policy implication that inflation
can be reduced or controlled by direct intervention in wage and price setting.
VI.2.4
This call to intellectual and expository activity is really all that I have to pronounce
here, but do not think that I shall relinquish the speaker's stand so quickly. My bald,
unsubstantiated statements surely require some elaboration—and, in addition, I must
at least seem to do more to qualify for the modest pay offered to speakers in these
meetings.

Market Power and Inflation

VI.2.5
The question of the relationship between market power and inflation can be disposed
of quickly by definition alone—if one accepts what I believe to be the most useful
definition of inflation. In the tradition of Mises, I believe the most useful way to
define inflation is as a situation in which the quantity of money is increasing more
rapidly than the output of goods and services (or, more precisely, than the
corresponding need for money). The wage and price increases which tend to follow
from this are but the symptoms of the situation itself. Thus, if by draconian measures,
all the wage-price-interest rate symptoms of inflation could be suppressed, the
inflation would still be present, but its symptoms would be in general (though not
universal) shortages of goods and services—in queues before the shops of the
butcher, the baker, and the candle-stickmaker. As Allen Wallis has pointed out, for
the housewife to encounter bare shelves at the fixed price is for her to suffer a fall in
the purchasing power of her money just as real as for her to encounter full shelves
but at higher prices.
VI.2.6
But doesn't the use of market power by large corporations or by small firms acting in
concert or by trade unions lead to reduced output of goods and services, thus
producing the Mises effect by its impact on the T element in the equation (MV=PT)?
In a word, no. The exercise of market power can change (in fact, distort) the use of
resources from what would have prevailed in the absence of that market power (e.g.,
fewer workers employed in construction and, because of that, more workers available
for other employments). This could lead to some prices (housing, say) being higher
than they would otherwise be, but, by the same token, other prices would be lower
than they would otherwise be. There is indeed damage to the consumer interest from
this state of affairs, but it is a damage different from (and to be corrected by different
means than) the damage from inflation. In insisting that the bite of the rattlesnake
does not cause cancer, I am not trying to say a kind word for the rattlesnake. I am
only trying to direct the doctor to the correct diagnosis and medication of the ailment.

But suppose one does not accept the Mises approach to defining inflation; suppose VI.2.7

one finds it more useful to define inflation as "generally rising prices" or some more
precise form of the same idea. Can inflation, so defined, be produced by the exercise

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of market power? Even with this definition, I would answer in the negative. This
definition, by the way, is roughly the one used by most of those who call themselves
"monetarists," and who argue as I do that inflation is essentially a monetary
phenomenon. Market power may indeed be used to cause some prices or wage rates
to be higher than they would otherwise be, but if the total of dollars remains
unchanged, this can in turn produce at worst a diverting of dollars from other goods
and services, with associated downward pressure on the relevant prices and/or wage
rates.
VI.2.8
But can't market power at least influence the lag between disturbances in M and
responses on the price and wage side? There is some evidence that this may indeed
happen in some cases, but so what? It is still not the market power that has produced
the inflation.
VI.2.9
Now that I have mentioned "evidence," perhaps I should pay some attention to those
of you who prefer something a little more concrete as an answer than warmed-over
Mises. I freely admit that I have undertaken no rigorous research of my own on the
question under discussion. What I have done is to read the reports from the research
of my "betters." Not too surprisingly, what I find there tends to confirm my original
presuppositions.
VI.2.10
For the single best summary of research findings (including his own) I suggest that
you turn to a monograph by Steven Lustgarten of City University of New York,
published by that most useful organization, the American Enterprise Institute. The
title is Industrial Concentration and Inflation, and it includes a foreword by Yale
Brozen of the University of Chicago, research director of the American Enterprise
Institute (and incidentally the man who first turned my own eyes in the direction of
market economics).
VI.2.11
Brozen summarizes the findings in his foreword as follows:

It is frequently argued that industries in which a few firms produce most of the
output charge higher prices than they would if the large, component firms were
broken into several smaller ones (as was done, for example, with the old
Standard Oil Company and the American Tobacco Company early in the
century). Whether or not the argument is valid, and much evidence to the
contrary has appeared, it does not follow that inflation is a consequence of a
highly concentrated industrial structure. Assuming, for the sake of argument,
that concentrated industries charge higher prices, we should suffer rising prices
only if industrial concentration were rising. But data for the U.S. economy show
average market concentration levels to be fairly stable. That being the case, no
connection should be expected between industrial concentration and inflation.

Professor Lustgarten examines the movement of prices of manufacturing

industries. He seeks to determine whether prices in the most concentrated
industries increase more rapidly than those in the less concentrated industries.
He finds that the price behavior of the highly concentrated industries has not
been a source of inflation in the United States. According to his data, the price s
of these defamed industries have not only not been a source of inflation, but
have risen more slowly than those in the atomistic industries. They have, in fact,
been a moderating factor in inflation. *59

Lustgarten's own summary runs as follows: VI.2.12

Both theoretical and empirical evidence relating industrial concentration to

inflation have been examined. The theoretical arguments were that
concentration promotes inflation because it allows sellers to maintain prices
when demand declines, to pass on inflationary wage increases, and to avoid

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competitive pressures to reduce costs. These arguments were found to be

inconsistent with the evidence, which showed that prices and unit labor costs
have increased more slowly in concentrated industries than in other
industries.*60

VI.2.13
Admittedly, what Lustgarten and others have done is largely to show that there seems
in fact to be no relationship between industrial concentration and inflation—and this
is not equivalent to proving that there is no relationship between market power and
inflation. Their findings may only suggest that there is no real relationship between
concentration ratios and the real exercise of market power—a thesis I believe to be
almost certainly valid.*61
VI.2.14
As a matter of fact, it is my firm conviction that neither concentration ratios nor
market shares nor profitability nor any of the usual criteria of imperfectly competitive
markets are of any significance to economic performance. To put it another way, I
believe that the only meaningful definition of monopoly is that of a position in a
market maintained by the use or threat of the use of force. Most commonly, the kind
of use of force I have in mind is technically legal, i.e., it comes directly from
governmentally enforced barriers to entry or to free market pricing as in plumbing or
banking or doctoring or what have you. But it is sometimes in the form of a
permissive attitude on the part of those charged with maintaining the peace towards
the use of violence by private groups, such as dairy farmers or automobile workers or
carpenters.
VI.2.15
I intend to return for final comment on this topic in the next section. At the moment I
wish to deal with the question of whether or not the exercise of this kind of real
market power might not be related to inflation. To the disappointment of many of
you, I suspect, I must reply that it is my firm belief that not only can Gulf Oil and
General Motors not produce inflation but neither can it be "manufactured" in the
regulatory offices, the tariff commissions, the city halls, or the courts of the land.
Again actions taken (or not taken) there can, like the rattlesnake, introduce a poison
into the economic system, but the poison is not that of general inflation.
VI.2.16
Here, in part at least, I must disagree with a man whose work I hold in highest
esteem, Professor Murray Weidenbaum. Here are his words:

As the American public is learning to its dismay, there are many ways in which
government actions can cause or worsen inflation. Large budget deficits and
excessively easy monetary policy are usually cited as the two major culprits, and
quite properly. Yet, there is a third, less obvious—and hence more
insidious—way in which government can worsen the already severe inflationary
pressures affecting the American economy.

That third way is for the government to require actions in the private sector
which increase the costs of production and hence raise the prices of the products
and services which are sold to the public.... Literally, the federal government is
continually mandating more inflation via the regulations it promulgates. These
actions of course are validated by an accommodating monetary policy.

In theory, the monetary authorities could offset much of the inflationary effects
of regulation by attempting to maintain a lower rate of monetary growth. In
practice, however, public policy makers, insofar as they see the options clearly,
tend to prefer the higher rate of inflation to the additional monetary restraint and
the resulting decreases in employment and real output. *62

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VI.2.17
Weidenbaum notes that the actions he describes require the validating influence of a
more rapid rate of increase in the quantity of money to produce their inflationary
effects, an admission usually made as well by those who argue that union action does
indeed lead to inflation. But here again I would object; if there are no more dollars
floating around, the primary effect of government regulation (whether wise or
unwise) will be to divert those dollars from one channel to another, with price
increases in some areas and price decreases in others, rather than to produce general
inflation.

Can Inflation Be Cured by Making the Economy More Competitive?

VI.2.18
The heavy emphasis I put upon this point seems to me to be necessary and
appropriate. While it is true that the Weidenbaum-type argument may strengthen the
case for a long-overdue dismantling of many parts of the regulatory apparatus (a
consummation devoutly to be wished), the general argument linking market power to
inflation is also being used by such men as Senators Hart and Bayh to propose
structural changes in American business that would bring in turn a sharp reduction in
the economic well-being of the masses of the people.
VI.2.19
As a matter of fact we have been saved from this fate over the years, under the
existing legislation, because of a largely tacit recognition by the political leadership
of the nation that antitrust makes for great rhetoric but lousy economics. I am
absolutely serious when I say to you that I believe the antitrust laws to be in direct
opposition to both the spirit and the practice of capitalism. The very criteria by which
a businessman measures his success in serving his stockholders and his
customers—increasing share of the market, industry leadership, superiority in
product and processes over rivals, above-average profitability—are often precisely
the same criteria used by the antitrust division of the attorney general's office as
evidence of noncompetitive markets. Or, to put it another way, how can we label as
"unjust" a position in the market that has been achieved over time through a series of
peaceful, non-fraudulent exchanges with willing partners?
VI.2.20
It is my firm conviction that Schumpeter was absolutely right when he argued that
"the power to exploit at pleasure a given pattern of demand ... can under the
conditions of intact capitalism hardly persist for a period long enough to matter ...
unless buttressed by public authority."*63
VI.2.21
It is my belief that competition inheres in the very nature of man and the exchange
economy; in the words of Adam Smith, "All systems of preference or of restraint,
therefore, being thus completely taken away, the obvious and simple system of
natural liberty establishes itself of its own accord."*64 Competition does not need to
be created or protected or restored; all that government need do to see that
competition prevails is not to get in its way.
VI.2.22
My position here is very similar to that taken by Joseph Schumpeter (and by Mises as
well), but I was not brought here to discuss with you the various views on the
meaning and nature of competition and monopoly. My assignment was to discuss the
question of whether or no the problem of inflation was significantly related to the
exercise of market power in the economy.

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VI.2.23
To summarize, I have argued that market structure and performance are not
significantly related to the problem of inflation. It follows from this that inflation
cannot be reduced or eliminated by actions taken to make the economy more
competitive. Moreover, I have insisted that for the nation to turn its policy eyes in
that direction would be for it to divert attention from the only area where it must look
if it is in fact to bring inflation under control—and, in the process, to be as likely to
produce harm as good in the market structures of the economy. Finally I have
identified that "only area" where a solution to the problem of inflation is to be found
as that of the money supply.
VI.2.24
This leaves unresolved all of the really important questions! What is the objective to
be sought in the making of monetary policy? No increase in M, however defined? a
steady rate of increase? is the proper dial to be watched M1 or M2 or M3? Should all
such attempts to create a controlled paper currency be abandoned and replaced by the
gold standard? If so, which of the many forms of the gold standard? or should some
other commodity standard be put in place?
VI.2.25
These are the topics with which other speakers are concerning themselves, and they
are not a part of my assignment. However, in closing, I cannot resist offering two
comments:
VI.2.26
(1) Turning the control of the money supply over to government, under any
conditions, is like turning the liquor store over to an alcoholic; and
VI.2.27
(2) I do not believe that any expert or group of experts can possibly devise a
monetary system as effective as the one that would spontaneously emerge in a
society in which the government played no more and no less of a role with reference
to money than I would have it play in all of economic life: maintain law and order,
enforce contracts, and stand ready to assist the plaintiff in cases of fraud. In money as
elsewhere, I prefer the rule of the market to the rule of men.

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